Investments in Russia

Investments in Russia Edition 2012-2014

BEITEN BURKHARDT Rechtsanwälte (German Attorneys-at-law), 2012-2014 Investments in Russia

Contents Preface 1 1. Special Framework Conditions for Foreign Investors 3 1.1 Legislative Basics 3 1.2 Content of the Law on Foreign Investments 3 1.2.1 Basic Provisions 3 1.2.2 Priority Investment Projects 4 1.3 Restriction of Foreign Investors Activities 5 1.3.1 Banking Sector 5 1.3.2 Insurance Services Sector 6 1.3.3 Investments in Businesses which are Strategically Important 7 2. Corporate Law 10 2.1 Forms of Commercial Activities in Russia 10 2.2 Representative Offices 10 2.2.1 Status of a Representative Office under Russian Law 10 2.2.2 Opening (Accreditation) of a Representative Office 11 2.2.3 Activities of a Representative Office 13 2.3 Branches 15 2.3.1 Status of a Branch under Russian Legislation 15 2.3.2 Accreditation of a Branch 15 2.4 Russian Legal Entities 16 2.4.1 Organizational and Legal Forms of Commercial Legal Entities in Russia 16 2.4.2 Registration of Legal Entities 17 2.5 Limited Liability Companies 19 2.5.1 Legal Status 19 2.5.2 Foundation Procedure 19 2.5.3 Charter Capital. Alienation of Shares 20 2.5.4 Agreements on Exercising Rights of Company Participants 22 2.5.5 Participant Withdrawal or Expulsion 22 2.5.6 Management Bodies 22 2.5.7 Liability of the Company and Its Participants 24 2.6 Joint Stock Companies 25 2.6.1 Legal Status 25 2.6.2 Establishment of Joint Stock Companies 26 2.6.3 Shareholders Register and the Registration of Share Issuances 27 2.6.4 Management Bodies 27 2.6.5 Executive Bodies of a Company 29 2.6.6 Liability in a Company 29 I

3. Bases of Legislation on Real Estate 31 3.1 General Characteristics of the Existing System for Legal Regulation in the Field of Real Estate 31 3.2 State Registration of Real Estate and Registration of Rights Thereto 32 3.2.1 State Registration of Land Plots 33 3.2.2 State Registration of Other Real Estate 33 3.2.3 State Registration of Rights to Real Estate 34 3.3 Acquiring Rights to Land Plots 35 3.3.1 Types of Rights 35 3.3.2 Acquiring Rights 35 3.3.3 Restrictions on the Rights of Foreigners 36 3.3.4 Status of a Land Plot 36 3.4 Acquiring Rights to Buildings and Structures 36 3.4.1 Acquiring an Existing Building (Structure) 37 3.4.2 Acquiring an Unfinished Building (Structure) 37 3.4.3 Constructing a Building (Structure) 37 3.5 Real Estate Pledge 38 3.6 Concession Agreements 39 3.7 Participation in Share Participation Construction 40 4. Labor Law 42 4.1 Employment Agreement 42 4.1.1 Term of an Employment Agreement 43 4.2 Probation Period 43 4.3 Compensation 44 4.4 Working Hours 44 4.5 Leave 45 4.6 Statutory Holidays 45 4.7 Secondary Employment. Prohibited Competition 46 4.8 Trade Secrets 46 4.9 Termination of Employment Agreements 47 4.10 Specific Features of the Employment of Company Executives 49 4.11 Financial Liability 50 4.11.1 Employee s Financial Liability 50 4.11.2 Employer s Financial Liability 50 4.12 Employment of Foreign Citizens 51 4.12.1 Employer s Obligations 51 4.12.2 Permitting Documents 52 4.12.3 Migration Registration 52 5. Taxation 53 5.1 Introduction 53 5.2 Main Innovations of the Tax Code of the Russian Federation 54 5.2.1 General Trend to Reduce Tax Rates 54 II

5.2.2 Cancellation of Tax Concessions for Particular Enterprises and Stimulation of Development of Certain Types of Activities 55 5.2.3 Tax Control 55 5.2.4 Tax Violations and Penalties 56 5.3 Existing Drawbacks of the Russian Tax System 56 5.4 General Overview of the Russian Tax System 57 5.4.1 Tax and Levies Legislation 57 5.4.2 Principles of Taxation 58 5.4.3 The System of Taxes and Levies in the Russian Federation 59 5.5 Corporate Profits Tax 60 5.5.1 Object of Taxation 60 5.5.2 Tax Rates 61 5.5.3 Procedure for Calculating Taxable Profit 61 5.5.4 Income 62 5.5.5 Expenses 63 5.5.6 Special Rules 63 5.5.7 Features of Taxation of Foreign Companies 63 5.5.8 Controllable Transactions and Transfer Prices 65 5.6 Value Added Tax (VAT) 65 5.6.1 Object of Taxation 65 5.6.2 Determining the Tax Base 67 5.6.3 Important VAT Concessions 68 5.6.4 Tax Rates 68 5.6.5 Procedure for Calculating, Deducting, and Paying VAT. Output and Input VAT 69 5.6.6 Controllable Transactions and Transfer Prices 69 5.7 Excise Taxes 69 5.7.1 Taxed Goods 69 5.7.2 Excise Rates 70 5.7.3 Procedure and Terms for Payment of Excise Taxes 76 5.7.4 Controllable Transactions and Transfer Prices 76 5.8 Transportation Tax 76 5.9 Corporate Property Tax 77 5.9.1 Object of Taxation 77 5.9.2 Tax Base 77 5.9.3 Tax Rate 78 5.9.4 Concessions on Property Tax 78 5.9.5 Payment Procedure and Terms 78 5.10 Customs Duty 78 5.10.1 Assessment Base 79 5.10.2 Customs Duty Rates 79 5.10.3 Concessions for Investors 79 5.10.4 Payment Procedure and Terms 80 5.11 Social Payments 80 5.11.1 General Description of the Social Payments System 80 III

5.11.2 Changes in the Social Payments System 81 5.11.3 New Procedure for Paying Insurance Contributions (introduced on January 1, 2010) 81 5.11.4 Contributions for Insurance Against Industrial Accidents and Occupational Diseases 82 5.12 Individual Income Tax 83 5.12.1 Object of Taxation 83 5.12.2 Tax Rate 83 5.12.3 Tax Collection Procedure 83 5.12.4 Foreign Citizens Obligation to Pay the Tax 83 5.13 Summary of Russian Taxes 84 6. State Controlling Authorities 86 6.1 Authorities that Carry Out State Registrations or Accreditations of Legal Entities, Their Representative Offices and Branches 86 6.2 Currency Regulation Authorities, Currency Control Authorities and Agents 86 6.3 Russian Federation Antimonopoly Authorities and Antimonopoly Regulation 88 6.3.1 Antimonopoly Legislation of the Russian Federation 88 6.3.2 Antimonopoly Authorities of the Russian Federation 89 6.3.3 Main Provisions of Antimonopoly Legislation of the Russian Federation 89 6.3.4 Regulatory Acts and Actions of Authorities and Local Authorities Aimed at Restricting Competition 95 6.3.5 Agreements (Concerted Actions) of Authorities and Local Authorities, State Non-Budget Funds and the Central Bank of the Russian Federation Restricting Competition 96 6.3.6 Unfair Competition 96 6.3.7 State Authorities Control over the Observance of Antimonopoly Legislation and Economic Concentration 97 6.3.8 Appealing Decisions and Instructions of the Antimonopoly Authorities. Liability for Violating Antimonopoly Legislation 103 6.4 The Federal Service for Financial Markets 104 6.5 Financial and Tax Authorities, Other Controlling Authorities 105 6.5.1 Tax Authorities of the Russian Federation 105 6.5.2 Ministry of Internal Affairs of the Russian Federation 106 6.5.3 Federal Service for Financial Monitoring (Rosfinmonitoring) 107 6.5.4 Federal Service for Financial and Budgetary Supervision 108 6.6 Customs Authorities 109 6.7 Governmental Commission for Control over Foreign Investments in the Russian Federation 111 7. Court System. Arbitration Courts 112 7.1 General Information on the Court System of the Russian Federation 112 IV

7.1.1 Concept of the Court System of the Russian Federation 112 7.1.2 Russian Federation Legislation on the Court System 112 7.1.3 Structure of the Court System of the Russian Federation 113 7.2 Arbitration Courts in the Russian Federation 114 7.2.1 Competence of Arbitration Courts 114 7.2.2 Consideration of Cases in Arbitration Courts (Arbitrages) 115 7.3 General Jurisdiction Courts of the Russian Federation 119 7.3.1 Competence of General Jurisdiction Courts 119 7.3.2 Consideration of Cases in General Jurisdiction Courts 120 7.4 Non-State Arbitration Courts in the Russian Federation 124 7.4.1 General Provisions 124 7.4.2 Separate Categories of Disputes Considered by Non-Governmental Arbitration Courts 125 7.4.3 Legislation on Non-Governmental Arbitration Courts in the Russian Federation 125 7.4.4 Preconditions for Commencing Non-Governmental Arbitration Proceedings 126 7.4.5 Advantages of Resolving Disputes in Non-Governmental Arbitration Courts 126 7.5 Alternative Dispute Resolution 127 7.5.1 General Provisions 127 7.5.2 Contractual Relations 127 7.5.3 Labor Law 128 7.5.4 Bankruptcy Law 128 8. Enforcement Proceedings. Bankruptcy 129 8.1 Enforcement Proceedings 129 8.1.1 General Provisions 129 8.1.2 Initiating Enforcement Proceedings 130 8.1.3 Enforcement Measures 131 8.1.4 Priority of Satisfaction of Claims 133 8.2 Bankruptcy 133 8.2.1 General Provisions 133 8.2.2 Particular Types and Stages of the Bankruptcy Procedure 134 8.2.3 Specific Features Regarding the Bankruptcy of Certain Categories of Debtors 139 9. Banking and Finance Law 141 9.1 Banking Activities 141 9.1.1 General Overview of the Banking System 141 9.1.2 The Central Bank of the Russian Federation 142 9.1.3 Licensing 142 9.1.4 Transition to International Banking Standards 143 9.1.5 Requirements for Russian Banks 144 9.1.6 Banks with Foreign Participation 144 V

9.1.7 Specialized Mortgage or Construction Savings Banks 144 9.1.8 Non-Banking Activities of Banks 144 9.1.9 Money Laundering Legislation 145 9.1.10 Deposit Insurance 146 9.1.11 Credit History Bureaus 147 9.2 Currency Regulation 148 9.2.1 General Overview 148 9.2.2 Currency Operations 149 9.2.3 Bank Accounts of Non-Residents 150 9.2.4 Repatriation of Earnings 151 9.2.5 Residents Reports on Currency Transactions 151 9.3 Securities 153 9.3.1 Legislation 153 9.3.2 Regulation of the Securities Market 153 9.3.3 Shares and Corporate Bonds 154 9.3.4 Depositary Receipts 155 9.4 Investment Funds 155 9.4.1 Unit Investment Funds 155 9.4.2 Joint Stock Investment Funds 157 9.4.3 Management Company of an Investment Fund 157 9.4.4 Specialized Depositories for Investment Funds 157 9.4.5 Investment Fund Shares 158 10. Protection of Intellectual Property 159 10.1 General Information on the Legal Regulation of Intellectual Property 159 10.1.1 Regulation of Intellectual Property in Russia 159 10.1.2 Brief Overview of Types of Protected Objects 159 10.2 Trademarks and Service Marks 160 10.2.1 Definition 160 10.2.2 Types of Trademarks 160 10.2.3 Origin of Rights, Scope of Protection, and Protected Rights 161 10.2.4 Well-known Trademarks 165 10.2.5 Participation of the Russian Federation in International Treaties 165 10.2.6 Transfer of Rights to a Trademark 165 10.3 Brand 168 10.3.1 Concept of Brand 168 10.3.2 Exclusive Right to a Brand 169 10.3.3 A Brand s Relationship to Other Means of Individualization 169 10.4 Copyright and Related Rights 170 10.4.1 Copyright Protection and Related Rights in Russia 170 10.4.2 Copyright Objects 170 10.4.3 Extent and Scope of Copyright Protection 172 10.4.4 Disposal of Copyright 177 10.4.5 Protection of Computer Programs and Databases 179 VI

10.4.6 Right of a Database Producer 182 10.5 Industrial Property 183 10.5.1 Industrial Property 183 10.5.2 Patent Law Objects, Registration Criteria 183 10.5.3 Patents for Industrial Properties 185 10.5.4 Extent and Scope of Protection 186 10.5.5 International Mechanisms for Patent Protection 187 10.5.6 Transfer of Rights to a Patent 188 10.6 Right to a Production Secret (Know-how) 188 10.6.1 Changes in Legislative Regulation 188 10.6.2 Definition 189 10.6.3 Trade Secret Protection 190 10.6.4 Exclusive Right to a Production Secret (Know-how) 190 10.6.5 Disposal of the Exclusive Right to a Production Secret 191 10.6.6 Ownership of the Exclusive Right to a Production Secret 191 10.6.7 Liability for a Breach of the Exclusive Right to a Production Secret 192 10.7 Protection of Rights in the Intellectual Property Sphere 192 10.7.1 Competent State Authorities 192 10.7.2 Consequences of Infringement and Remedies 194 Contacts 196 VII

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Preface BEITEN BURKHARDT s Russian team is glad to present a new edition of the brochure on investing in Russia. In 2012 we present what is already the 10th edition of the brochure. This year marks twenty years since the international law firm BEITEN BURKHARDT started working on the dynamically developing Russian market. After opening offices in Moscow (in 1992) and Saint Petersburg (in 1996), BEITEN BURKHARDT became the first German law firm to work for clients in two of the largest and most important Russian regions economically. We are deeply grateful to our clients for the confidence that they have shown us over the past two decades. As in the past we have developed this brochure not only to acquaint potential investors with the fundamentals of Russian law, but also to enable businessmen already operating in Russia and keen to obtain up-to-date information on legislative amendments to use it as a reference guide. In this revised edition we have once again reviewed legislative innovations and also set out our practical recommendations based on our experience of implementing joint projects in Russia with our clients. We sincerely hope that, based on our successful practice, we have managed to include in the brochure forecast and well-planned ways of establishing a business and operating in Russia. Should you have any questions, please do not hesitate to contact us our best lawyers and attorneys in Moscow and Saint Petersburg are at your disposal. You will find contact details on the last page of the brochure. In closing, we would like to point out that we issue newsletters on a regular basis which you will find on our website. We would also be glad to include you in our electronic distribution list. BEITEN BURKHARDT Moscow Saint Petersburg September 2012 1

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1. Special Framework Conditions for Foreign Investors 1.1 Legislative Basics The document regulating foreign investments in the Russian Federation is the Federal Law On Foreign Investments in the Russian Federation No. 160-FZ dated July 9, 1999 (hereinafter the Law on Foreign Investments ). In addition to the said law, which determines and guarantees the fundamental rights of foreign investors, there are other regulatory acts that are both directly and indirectly aimed at governing relations connected to investment. Such regulatory acts include, for instance, the Federal Law On Agreements for the Division of Commodities No. 225-FZ dated December 30, 1995, and the Federal Law On the Procedure of Carrying Out Investment in Businesses which have Strategic Significance in the Provision of National Defense and Security, No. 57-FZ dated April 29, 2008. In addition, investors may be granted certain extra guarantees under bilateral international agreements concluded by the Russian Federation. In particular, assistance agreements on the conduct and mutual protection of capital investments have been concluded with the governments of states including Switzerland, Norway, Italy, USA, Japan, and China. Furthermore, the Russian Federation is the legal successor to the former USSR under similar agreements concluded with the governments of Germany, France, Great Britain, Austria, and Finland. 1.2 Content of the Law on Foreign Investments 1.2.1 Basic Provisions Foreign investments in the Russian Federation may be carried out in any form not specifically prohibited by legislation of the Russian Federation. The legal structure provided for foreign investors in the Russian Federation is analogous to the one provided for Russian organizations. Any restrictions on the rights of foreign investors may be imposed only by federal law, and only to the extent necessary for the protection of fundamental constitutional principles, morals, health, rights and lawful interests of other persons, and for the provision of national defense and security. Any property belonging to foreign investors or commercial organizations in which foreign investors have an interest may not be the subject of seizure. Exceptions to this rule may only be established by a legislative procedure and must provide compensation for losses. 3

Upon payment of the relevant taxes and charges stipulated by Russian Federation legislation, foreign investors are entitled to freely use revenues and profits in the Russian Federation, as well as to transfer these same revenues outside Russia. Foreign investors may transfer their rights and obligations to another party on the basis of an agreement. Additionally, foreign investors are granted the right of reimbursement for losses inflicted by unlawful actions (or omissions) by state or local authorities, or by officials thereof. 1.2.2 Priority Investment Projects When foreign investors undertake direct investments or implement priority investment projects, they may be granted certain concessions and additional guarantees. Direct investments carried out by a foreign investor are construed as: a foreign investor s acquisition of no less than 10% of the shares in the charter capital of an already existing or newly established commercial organization in the Russian Federation, in the form of an economic partnership or a company in accordance with Russian Federation civil legislation; a contribution of funds to the fixed assets of a foreign legal entity s branch to be established in the Russian Federation; acting as a lessor in the Russian Federation with respect to particular types of equipment, having a customs value of no less than 1 million rubles. A priority investment project is an investment project that simultaneously meets the following two conditions: The total volume of investment in the project is equal to no less than 1 billion rubles (or the equivalent in a foreign currency, at the exchange rate of the Central Bank of the Russian Federation on the date the Law on Foreign Investments came into force approximately EUR 40,000,000), or the share of foreign investment in the charter capital of a commercial organization implementing the project is equal to no less than 100 million rubles (or the equivalent in a foreign currency at the exchange rate of the Central Bank of the Russian Federation on the date the Law on Foreign Investments came into force approximately EUR 4,000,000); The investment project is included on the list of priority investment projects to be approved by the Government of the Russian Federation. It should be noted that at the time this brochure was drafted, this list of priority investment projects had not yet been approved. 4

The Law on Foreign Investments provides foreign investors with a guarantee, widely used in international practice, of protection from negative changes in the legislation of the host country (the grandfather clause ). In accordance with Article 9 of the Law on Foreign Investments, new federal laws and other legal regulatory acts of the Russian Federation that increase the total tax burden on the activities of an investor and commercial organization with foreign investments, or which establish a less advantageous regime with respect to foreign investment, shall not be applied within the payback period of the project, but not for longer than seven years from the commencement date of the financing of this project through foreign investment. The guarantee of protection from negative changes in Russian Federation legislation is applied in relation to investors and commercial organizations with foreign investment that implement priority investment projects (regardless of the size of the share of foreign investment in the charter capital), as well as in relation to commercial organizations in whose charter capital the share of foreign investment exceeds 25%. This guarantee is valid with respect to the following taxes: federal taxes (with the exception of excise taxes and VAT on commodities produced in the Russian Federation); payments to state non-budgetary funds (with the exception of payments to the Pension Fund of the Russian Federation). Russian Federation tax legislation does not currently provide protection for investors from negative changes in legislation, which makes this guarantee difficult to implement in practice. 1.3 Restriction of Foreign Investors Activities The theoretically equal status of foreign and local investors in the Russian Federation does have exceptions. For instance, investment by foreign individuals in the banking and insurance spheres is restricted, as well as investment in businesses that are strategically important. 1.3.1 Banking Sector The Federal Law On Banks and Banking Activities No. 395-I dated December 2, 1990, details additional requirements for the foundation and commercial activities of credit institutions with foreign investment, and branches of foreign banks in the Russian Federation. In accordance with Article 18 of the above-mentioned Federal Law, the admissible share of foreign capital in the banking system of the Russian Federation shall be established through a legislative procedure. The admissible share of foreign capital in the banking system of the Russian Federation is calculated as a ratio of the total amount 5

of stakes belonging to foreign investors in the charter capitals of credit institutions and the amount of stakes belonging to foreign banks to the total amount of capital of all credit institutions registered in the territory of the Russian Federation. The Central Bank of the Russian Federation is entitled to prohibit an increase in charter capital or an alienation of shares in the charter capital of credit organizations, if as a result of such actions the admissible share of foreign capital in the banking system of the Russian Federation will be exceeded. However, the federal law that establishes the admissible share of foreign capital in the banking system of the Russian Federation has not yet been adopted. 1.3.2 Insurance Services Sector The basic legal act regulating the insurance services sector is the Law of the Russian Federation On the Organization of Insurance Business in the Russian Federation No. 4015-1 dated November 27, 1992, which establishes certain restrictions on foreign insurance organizations activities through their subsidiaries and associated companies in Russia. According to Article 6 of the above-mentioned law, subsidiaries of foreign investors (foreign insurance companies) and insurance organizations, in which the foreign investors share of charter capitals exceeds 49%, may not provide compulsory insurance or life insurance. They also may not provide compulsory state insurance or issue property insurance related to making deliveries or performing works for the state, or insure the property interests of state and municipal organizations. It should be noted that these restrictions do not cover instances in which foreign investors are companies from EU countries. An insurance organization, which is a subsidiary of a foreign investor, has the right to carry out insurance activities in Russia, provided the foreign investor has existed as an insurance company for at least 15 years, is performing its activities in accordance with the legislation of the state of incorporation, and has been participating, for at least 2 years, in the activities of insurance companies established in Russia. The share (quota) of foreign capital in the charter capital of any insurance company registered in Russia may not exceed 25%. When the indicated maximum allowable shareholding is either reached or exceeded, the controlling authority, responsible for the supervision of the insurance sector, stops issuing permits for the performance of insurance activities to subsidiaries of foreign insurance companies and insurance organizations, in which the foreign investors share exceeds 49%. The permission (preliminary consent) of the insurance supervisory authority is required for transferring shares in the charter capitals of Russian insurance companies to foreign investors and their subsidiaries. 6

Any increase in the capital of an insurance company through funds from foreign investors and their subsidiaries also requires prior permission from the insurance supervisory authority. 1.3.3 Investments in Businesses which are Strategically Important The Federal Law On the Procedure of Foreign Investment in Businesses which are Strategically Important for National Defense and Security No. 57-FZ dated 29 April, 2008 (hereinafter the Law on Foreign Investment in Businesses which are Strategically Important ), establishes restrictions on foreign investors who purchase shares in businesses which are strategically important for national defense and security, as well as during the completion of other deals with foreign investors that result in the establishment of control over these businesses. A business which is strategically important for national defense and security (hereinafter a business which is strategically important ) is a company created in the Russian Federation with limited liability, an additional liability company, or a joint stock company, which carries out at least one type of activity which is strategically important. The Law on Foreign Investments in Businesses which are Strategically Important outlines forty two types of such activity, which can be consolidated into several groups: activity connected with nuclear material or radioactive substances; development, production, distribution, renovation, or use of military technology, weapons, ammunition and explosive materials; space activity, activity related to aviation security, development, production, testing and overhaul of aviation technology; activity in the field of mass information; development, production, distribution or technical service of encoded (cryptographic) assets; development, production, distribution and identification of electronic machinery intended for the secret gathering of information; surveying and extracting valuable substances from the subsoil of land plots of federal importance, and the storage of biological water resources; activity connected with the use of infectious disease agents; work involving hydrometeorological and geophysical processes and phenomena. 7

The limitations for a foreign investor consist of the need to receive prior consent from the authorized state body (for further information see Section 6.7 Governmental Commission for Control over Foreign Investment in the Russian Federation ) upon the completion of the following transactions: transactions (excluding transactions with respect to shares (participation interest) comprising the charter capital of a business which is strategically important and using subsoil of federal significance), the completion of which result in the foreign investor (or group) purchasing more than 50% of the voting shares (participation interest) of the charter capital of the business which is strategically important and (or) the possibility to elect more than 50% of the makeup of the board of directors (or the board of supervisors), or acquiring the right to appoint the sole executive authority or upwards of 50% of the makeup of the collegial executive body of such a business; transactions which result in the foreign investor (group of parties) acquiring the right to dispose of 25% or more of the voting shares (participation interest) of the charter capital of a business which is strategically important and using subsoil of federal significance, and (or) the possibility of electing 25% or more of the board of directors (supervisory board), or acquiring the right to appoint the sole executive body or 25% or more of the collective executive body of the business; transactions aimed at the foreign investor (group of parties) acquiring shares (participation interest) of the charter capital of a business which is strategically important and using subsoil of federal significance if the foreign investor (group of parties) has the right to dispose of 25% or more of the voting shares (participation interest) of the charter capital of the business (excluding transactions for acquisition by a foreign investor (group of parties) of shares (participation interest) in the charter capital of a business, as a result of which the share of the foreign investor (group of parties) in the charter capital of such a business will not be increased); transactions aimed at a foreign state, international organization or organization under the control thereof acquiring the right to dispose of more than 25% of the voting shares (participation interest) of the charter capital of a business which is strategically important (excluding a business using subsoil of federal significance); transactions aimed at a foreign state, international organization or organization under the control thereof acquiring the right to dispose of more than 5% of the voting shares (participation interest) of the charter capital of a business which is strategically important and using subsoil of federal significance; agreements that allow a foreign investor (an individual included in the group of parties) to perform the functions of a manager in relation to a business which is strategically important; 8

other transactions aimed at transferring - to a foreign investor (group of parties) - the right to determine the decisions of the management bodies of a business which is strategically important, including the conditions for it to conduct business operations. A foreign investor intending to conduct any of the said transactions or establish control over a business which is strategically important must submit a respective petition for prior consent to such a transaction, or a petition for consent to establish control, to the authorized state body. The consideration process of such a petition takes approximately three months. It is important to note that the authorized state body is entitled to make the issue of an affirmative decision conditional upon the imposition of certain obligations on the foreign investor (person included in the group of parties) (for example, the continuance of valid contracts by the business which is strategically important, maintaining prices for output (rendered services), maintaining the number of personnel, etc). Transactions for the acquisition of shares (participation interest) in businesses which are strategically important, as well as transactions entailing the establishment of control over such businesses, which are conducted without the consent of the authorized state body, are subsequently void. 9

2. Corporate Law 2.1 Forms of Commercial Activities in Russia Foreign investors can carry out commercial activities in Russia in various forms: export/import of goods or services with no permanent presence in Russia; on the basis of a joint venture agreement; via a representative office or branch of a foreign company; through a legal entity established under Russian law (subsidiary, joint venture). The legal status of representative offices and branches of foreign companies, as well as the organizational and legal forms of Russian legal entities most often used in practice Limited Liability Companies and Joint Stock Companies are considered in greater detail further in this section. 2.2 Representative Offices 2.2.1 Status of a Representative Office under Russian Law A representative office does not have the status of a legal entity, but is rather a subdivision of a foreign legal entity in Russia, which represents and protects the foreign company s interests. The legal basis for the establishment and operations of representative offices is the Regulation of the Council of Ministers of the USSR On Approval of the Provision on the Procedure for the Opening and Operations of Representative Offices of Foreign Firms, Banks and Organizations in the USSR No. 1074 dated November 30, 1989. The establishment and activities of representative offices of foreign banks and other lending organizations are also regulated by the provisions of the Order of the Central Bank of the Russian Federation No. 02-437 dated October 7, 1997. A representative office acts on behalf of, and following the instructions of, the foreign company in question and carries out activities in accordance with Russian legislation. The issue of taxation on the income of representative offices of foreign companies is regulated by Russian legislation, as well as by treaties concluded by the Russian Federation on the avoidance of double taxation. 10

2.2.2 Opening (Accreditation) of a Representative Office In accordance with Russian legislation, a representative office of a foreign legal entity in Russia may be opened only upon permission of the accrediting body. In particular, accreditation is required in order to open bank accounts at Russian banks, rent premises, and hire employees. A representative office can be accredited by the following organizations: a competent specialized ministry; the Chamber of Commerce and Industry of the Russian Federation; the State Registration Chamber of the Ministry of Justice of the Russian Federation. In general, to the extent permitted by law, the State Registration Chamber is preferred here, since the State Registration Chamber also maintains the Consolidated State Register of Accredited Representative Offices of Foreign Companies on the Territory of the Russian Federation. Therefore, a representative office can be both accredited and entered into the Consolidated Register at the same time. The following documents must be submitted to a registration body for accreditation of a representative office: an application requesting permission to open a representative office; an excerpt from the trade register, or another document verifying the registration of the foreign legal entity in the country where it is located; a letter of recommendation from a bank servicing the foreign legal entity, verifying its solvency; the foreign legal entity s articles of association; the decision by the foreign legal entity to open a representative office in Russia; the Provision on the representative office; the power of attorney, vesting the head of the representative office in Russia with the necessary powers; the power of attorney issued to a representative, for the purpose of representing the interests of the foreign legal entity on issues connected with the opening of the representative office; 11

a document confirming the representative office s address in Russia (for instance, a premise lease agreement or a letter of guarantee); letters of recommendation from at least two Russian business partners of the foreign legal entity; a card containing information about the representative office being opened. All documents executed abroad must be legalized or apostilled, and have a notarized translation into the Russian language. A permit to open a representative office is issued by a registration body for 1, 2 or 3 years, with the possibility of extending the term (for a further 1, 2 or 3 years) on the basis of an application from the foreign legal entity. If a foreign legal entity fails to apply on time to a registration body for an extension of the accreditation term, the representative office shall be considered to have terminated its operations upon the expiration of the accreditation term. At present, the State Registration Chamber charges the following fees for the accreditation of a representative office: for 1 year 35,000 rubles; for 2 years 65,000 rubles; for 3 years 80,00 rubles. The fees for extending a representative office s accreditation are: for 1 year 35,000 rubles; for 2 years 50,000 rubles; for 3 years 65,000 rubles. The issuance of a permit to open a representative office and a certificate of entry of the representative office in the register of accredited representative offices, as well as extending accreditation, usually takes 21 business days. In a case of expedited issuance (within 7 business days), 15,000 rubles must be paid in addition to the initial fee. 12

2.2.3 Activities of a Representative Office 2.2.3.1 Management of a Representative Office The activities of a representative office are managed by the head of the representative office, who acts on the basis of power of attorney issued by the foreign legal entity. It should be noted that the powers of the head of a representative office must be certified solely by power of attorney, and may not stem solely from instructions contained in the Provision on the representative office or the foundation documents of the foreign legal entity. The head of a representative office is entitled to delegate his/her powers in full or in part to another person, if such an option is provided for by the power of attorney issued to the head of the office. 2.2.3.2 Main Documents of a Representative Office The mutual relations between a representative office and the foreign legal entity that established it are based on the following documents: the foreign legal entity s foundation documents; the power of attorney issued to the head of the representative office in accordance with the requirements set out above; the Provision on the representative office, which must include the following sections: -- -- -- -- -- -- -- the representative office s status in the foreign legal entity s hierarchy; the documents that govern the representative office s activities; the location of the representative office; the objectives in establishing the representative office, and the types of activities it will carry out; the management bodies of the representative office (the powers of the head of the representative office); the property of the representative office, and the procedure for possessing and disposing of such property; the procedure for employing regular and temporary employees of the representative office; 13

-- -- the procedure for submitting reports of the representative office to the authorized bodies of the Russian Federation; the procedure for terminating the activities of the representative office. 2.2.3.3 Engaging Foreign Employees All foreign employees of a representative office and, if necessary, members of their families may and, in some cases (e.g. foreign employees of representative offices of foreign banks) must, be personally accredited by a registration body. Personal accreditation is provided for the specified number of foreign employees stated in the permit to open the representative office. As a rule, the number of foreign personnel may not exceed five people, but this number can be increased in certain circumstances and where there are strong grounds to do so (for instance, special qualifications of foreign specialists, their unique work experience, etc.). Personal accreditation of foreign citizens confirms their official status as employees of a representative office in the Russian Federation. The registration body provides services connected with passport and visa support to accredited personnel of representative offices and members of their families. However, in most cases, the accreditation of foreign employees of representative offices is not obligatory. The procedure for foreign citizens to work in Russia is regulated by the Federal Law On the Legal Status of Foreign Citizens in the Russian Federation No. 115-FZ dated July 25, 2002, in accordance with which an employer is entitled to employ foreign personnel only if a permit to engage and use foreign employees has been obtained, and a foreign citizen has the right to work in Russia only if he/she has a work permit. By implication of this law, an employer can be either an individual or a legal entity, including a foreign legal entity having a representative office in the territory of Russia. However, the law establishes an exception to the general procedure for employees of representative offices of foreign legal entities duly accredited in Russia. This exception applies to representative offices of legal entities registered in those countries with which the Russian Federation has entered into a treaty, or if similar rules are effective in the country of incorporation of a respective foreign legal entity (e.g. based on the principle of reciprocity). Currently, there is only one such treaty, concluded between the Russian Federation and France. Thus, in most current cases foreign legal entities must ensure the issuance of work permits to foreign employees of their representative offices in Russia. Personal accreditation of an employee of a representative office does not release such employees from the necessity to obtain a work permit, nor does it release the respective representative office from the necessity to obtain a permit to engage and use foreign employees. 14

2.3 Branches The Federal Law On Foreign Investments in the Russian Federation No. 160-FZ dated July 9, 1999, provides for the possibility to establish subdivisions of foreign legal entities in Russia in the form of branches. A branch is a separate subdivision of a legal entity not located at the registered seat of the legal entity, and performing all or part of the functions of the legal entity, including representative functions. 2.3.1 Status of a Branch under Russian Legislation The Civil Code of the Russian Federation and the Federal Law On Foreign Investments in the Russian Federation dated July 9, 1999, No. 160-FZ, which are the legal bases for the operations of branches, reflect the main functional distinction between branches and representative offices: a branch of a foreign legal entity created in the Russian Federation performs a part, or all, of the functions, including representative functions, on behalf of the foreign legal entity by which it was created, whereas representative offices exclusively perform representative functions. Opening a branch is expedient in cases when the foreign legal entity plans to carry out active commercial activities in the Russian Federation. Among the features of branches, it should be noted that the provision for a branch must indicate the composition, volume and terms of property investments made as contributions to the fixed assets of the branch. The valuation of the property transferred to a branch should be conducted by the foreign legal entity on the basis of domestic or global prices, and the equivalent sum in rubles indicated in the provision for the branch. 2.3.2 Accreditation of a Branch There is currently no significant differences between the procedure for opening a branch and that for opening a representative office, including the documents required. In a case of opening a branch, it is not necessary to provide the accrediting body with recommendation letters from business partners, or documents confirming the address of the branch. The other documents required for the opening of a branch are identical to those required for the opening of a representative office. A permit to open a branch is issued by the State Registration Chamber for a term of 1, 2, 3 or 5 years, with the possibility of an extension for a further 1, 2, 3 or 5 years on the basis of an application from the foreign legal entity. The state duty, at the amount of 120,000 rubles, must be paid to open a branch, and the State Registration Chamber charges the following fees for accreditation: For 1 year 20,000 rubles; 15

For 2 years 35,000 rubles; For 3 years 50,000 rubles; For 5 years 75,000 rubles. The same fees are charged for extending the accreditation term. The issuance of a permit to open a branch and a certificate of entry in the state register during accreditation or extension of accreditation usually takes 21 business days. In the case of expedited issuance (within 7 business days), 15,000 rubles must be paid in addition to the initial fee. 2.4 Russian Legal Entities Russian legislation considers a legal entity to be an organization that either has ownership, economic control or operational management of separate assets, and is liable for its obligations with such assets, that may in its own name acquire and exercise property and personal non-property rights, bear obligations, and be a plaintiff or a defendant in court. The Civil Code of the Russian Federation is the basis for the legal regulation of legal entities. Special laws are also particularly important: The Federal Law On Joint Stock Companies No. 208-FZ dated December 26, 1995, The Federal Law On Limited Liability Companies No. 14-FZ dated February 8, 1998, the Federal Law On Production Cooperatives No. 41-FZ dated May 8, 1996, and others. Legal entities are divided into commercial and non-commercial entities. Commercial legal entities pursue profit as their main operational objective, distribute generated profit between their founders, and are entitled to carry out any type of operations not prohibited by law. Conversely, non-commercial legal entities do not pursue profit as their main operational objective; as a general rule, they do not distribute generated profit between their founders (or members) and are entitled to carry out business operations corresponding only to the objectives for which they were established and only in pursuit of those objectives. 2.4.1 Organizational and Legal Forms of Commercial Legal Entities in Russia The following organizational and legal forms of legal entities fall under the category of commercial: 16

unlimited partnership a partnership whose participants, in accordance with the agreement concluded between them, carry out business operations in the name of the association and bear liability for its obligations with their property; limited partnership (general partnership) a partnership in which, along with the participants carrying out business operations in the name of the partnership and being liable for the partnership s obligations with their property (full partners), there is, to a lesser degree, one participant with liability limited in the amount of its contribution, and who does not participate in the partnership s business operations; limited liability company a company whose charter capital is divided into shares; the participants in such a company are not liable for its obligations, and bear the risk of losses connected with company operations only to the extent of the value of their shares; additional liability company a company whose charter capital is divided into shares; the participants in such a company jointly and severally bear additional liability for its obligations with their property to the same extent for all, as a multiple of the value of their shares; joint stock company a company whose charter capital is divided into a particular number of shares; the participants in such a company (shareholders) are not liable for its obligations, and bear the risk of losses only to the amount of the value of their shares; production cooperative (work association) an association of individuals for the purpose of joint production and other business activities based on membership and personal labor or other participation, and on its members combining property equity contributions; unitary enterprise a commercial company that does not have the ownership right to the property allocated thereto by the owner (state and municipal enterprises are established in this legal form). In practice, commercial legal entities in which the founders are liable with their property for the obligations of such organizations are not common in the Russian Federation. The most common forms of commercial legal entities, including those through which foreign investors conduct business in the Russian Federation, are the limited liability company (LLC) and the joint stock company (open (OJSC) and closed (CJSC)). 2.4.2 Registration of Legal Entities The Federal Law On State Registration of Legal Entities and Individual Entrepreneurs No. 129-FZ dated August 8, 2001 (hereinafter the Law on Registration ), 17

regulates the procedure for registering newly established legal entities. Currently, they are established on the basis of the One Window Principle, in accordance with which, and in order to have a fully functioning legal entity properly registered, it is sufficient to submit the documents to one state authority. The registration of a legal entity is carried out as follows: the organization is registered as a legal entity with the tax authorities, and concurrently registered with the state statistics bodies and extrabudgetary funds. The registration of legal entities is signified by their entry in the Single State Register of Legal Entities by an authorized regional tax body. The tax body at the location of the established legal entity is authorized to perform this function. In accordance with Article 12 of the Law on Registration, the following documents must be submitted for the registration of a legal entity: an application for state registration in the established form. The signature of the person submitting the application must be notarized. The application may be signed by the individual founder, or by the head of the founder (being a legal entity); the decision to establish the legal entity in the form of minutes of the founders meeting, or the decision of the sole founder; the legal entity s foundation documents; an excerpt from the register of foreign legal entities of the country of the founder s origin, or another certificate proving the legal status of the founder - foreign legal entity; a document showing payment of the state duty for registration of the legal entity at the amount of 4,000 rubles. In accordance with Article 8 of the Law on Registration, the state registration of legal entities is carried out within 5 business days from the moment of submission of the necessary documents to the tax body. Upon completion of the registration, the legal entity is issued a certificate of state registration. The registration authority concurrently issues the legal entity documents verifying its registration with other state bodies and extra-budgetary funds: certificate of registration as a taxpayer with the tax authority at the location of the legal entity; information letter of the regional body of the Federal Service for State Statistics on the assignment of statistics codes to the legal entity; 18

notice of the legal entity s registration with the regional body of the Pension Fund of the Russian Federation; notice of the legal entity s registration with the regional body of the Social Insurance Fund of the Russian Federation. In some cases, if the amount of assets or overall earnings of the founders of a legal entity exceeds the amounts established by Russian Federation legislation, then establishing a legal entity requires the preliminary consent or subsequent notification of the Russian antimonopoly authorities. The grounds and the procedure for applying to the antimonopoly authorities are described in more detail in points 6.3.7.1 and 6.3.7.2 of Section 6.3.7 State Authorities Control over the Observance of Antimonopoly Legislation and Economic Concentration. 2.5 Limited Liability Companies 2.5.1 Legal Status A limited liability company is a company founded by one or several persons, and whose charter capital is divided into shares. A limited liability company acquires legal capacity from the moment of its state registration. The legal status of a limited liability company is regulated by the Civil Code of the Russian Federation and the Federal Law On Limited Liability Companies No. 14-FZ dated February 8, 1998 (hereinafter the Law on Limited Liability Companies ). 2.5.2 Foundation Procedure A limited liability company may be founded by one or several parties. However, a limited liability company may not have, as its sole participant, any other business entity comprised of one party. A company is founded through holding a foundation meeting, at which the founders adopt a resolution to establish a limited liability company, elect the management bodies of the company, and approve the company s articles of association. The founders of the company also conclude a written agreement on the foundation of the company, determining the procedure for carrying out joint actions in founding the company, the amount of the charter capital of the company, the amount and nominal value of the shares of each founder of the company, as well as the amount and nature of, and terms for paying for, such shares in the charter capital of the company. In the case of a foundation of a company by one party, the agreement on the foundation of the company is replaced by a resolution of the sole participant on establishing the company. 19